Higher EPS Pension: Can EPFO pay Higher Pensions or will it go bust?

Almost every EPF member who was part of the EPFO before Sep 1st 2014 has one or all these questions on their minds: Will I get higher EPS pension? Am I eligible for it if I am already retired? How much will my EPS pension increase? I can answer, the “am I eligible” question accurately (see circular below). I answered the “how much will it increase?” question last week and this week, let us consider a far more important question: Can the EPFO manage to pay the higher pensions? Let us first understand that it is not as simple as “the government will step in and make up the shortfall if any”.

Am I eligible for higher EPS pension if I am already retired?

This is plainly illogical. once you retire, you are no longer part of the EPS and will only get the pension you deserve – based on your past EPS contributions. The EPFO has made an interim decision that makes it quite clear: if you did not contribute more than Rs. 5000 or Rs. 6,500 a year (part of EPS 1995), there is no question of getting a revised EPS pension.

Don’t get your hopes up. The EPFO will be plumb crazy if they allow retirees to draw higher EPS pension in exchange for a lump sum after they have retired. The annuity rates on such an arrangement would be so high (~ 7-9%) that it may soon become bankrupt. So for their own sake, I hope they do not do it.

How much will my EPS pension increase?

There is another huge problem for the EPFO. Although an employee has to contribute to the EPS for the entirety of their service, the EPS pension is calculated only on the average 60 months contribution before retirement. This was a fantastic deal for the EPFO as they could dole out a petty pension for a lifelong contribution. Even if the monthly contribution is 8.33% of the full basic+DA, it is not a bad arrangement for them – the employee will contribute for a minimum of 10 years and a maximum of 35 years. So the last 5 year contributions used for EPS pension will not hurt the EPFO too bad. Why? Becuase although the EPS contributions are invested, they do not earn any interest to the employee. You can use this Revised EPS Pension Calculator to check the higher EPS pension and check how healthy that is wrt inflation.

Beware: The prospect of a higher pension is the same as the prospect of huge returns from Bitcoin. It has the potential to shut out practical problems and common sense.

So what is this huge problem? Anyone who is going to retire within the next few years (say 5 or less) can send an application through their employer and increase the EPS contribution to 8.33% of full basic + DA for the last few years only and still be eligible for the full higher EPS pension. This is a great deal for the employee and a terrible deal for the EPFO as the annuity rates on those pensions will be still quite high.

Yes, yes, you value a higher pension, but there must be an organisation around to give it in the first place! That is the subject of this post.

Can EPFO manage to pay Higher EPS Pension or will it go bust?

This post is inspired by this 2013ETWealth report linked by a reader. First, let us consider some data and facts from the above linked EPFO annual report.

Crucial ruling 1: For accounts opened after 1st Sep 2014, if the salary is above the wage limit, there will be no EPS contributions. This is the first major push towards NPS for at least earning a higher income. Ref: pwc news

Crucial ruling 2: The increase from 6500 to 15000 of the wage ceiling. This lead to a significant increase in employer’s contributions to the EPS pension fund.

These two crucial rulings could well save the EPFO from going bust.

That is pretty healthy in terms of the EPFO’s ability to pay EPS higher pension. So what is the problem?

The employer’s pension scheme 1995 (EPS’ 95) requires an annual valuation of its pension fund by a valuer to ascertain its health which is the key to answering the above question. According to the EPFO annual report 2015-16 from which the following information has been sourced, M/s. K.A. Pandit, Consultants & Actuaries has been the valuer of the EPS fund from the 14th valuation in 2010 to the 19h valuation in 2015. EPFO received the 2015 report march 31st 2015 and submitted it to the government in end of June 2016. So you can understand the kind of information we are dealing with here and the speed at which things are processed.

These are the results of the 2015 Valuation.

The valuation first calculates the present value of future contributions (A)in the EPS pension fund (from what I gather assuming a rate of growth at 7%) and then calculates the present value of future EPS pension payouts (C) (from what I understand, assuming a rate of increase of 8%).

The corpus as on March 31st 2015 is shown above (B). So (A+B) -C results in a small surplus. This means the EPFO will barely make ends meet. This valuation has resulted in a deficit for several years in the past. The increased wage ceiling from 6500 to 15,000 has saved it.

This valuation does not consider the recent supreme court ruling. So here is an extremely conservative projection. Please, note that I am erring on the side of caution deliberately. If the EPFO can survive under these projections, then it is more than likely to survive under realistic projections (which as on date cannot be made).

What you see below for the first 4 years is actual data from FY 2011-12 to 2015-16. After are my projections.

Higher EPS Pension: Projected rate of growth

I am expecting the pensions to suddenly shoot to the roof for a couple years and then gradually decreasedue to requests for higher pensions from subscribers.

The EPS pension corpus will also increase for a few years and the decrease since higher EPS contributions need to be made to receive higher EPS pension.

Higher EPS Pension: Projected EPS Pension corpus and pension payouts

Here is the projection with real data for initial 5 years of the actual EPS corpus and total EPS payouts.

If you agree that the rates of growths assumed above are conservative enough -we can assume EPFO does not let retirees pay a lump sum in exchange for higher EPS pension – then, the EPFO will not go bust for at least 18 years or so.

Is this good news or bad news? I would say pretty good news. This is a simplistic projection and even if the EPFO is above to hold out without government bailouts for next decade, it would be a great achievement.

This is the reason two crucial rulings mentioned above are key. Today the EPFO is in better health because the wage ceiling was increased from Rs. 6500 to Rs. 15,000 (one could argue that is the reason for the increase). Since members who joined after 1st Sep 2014 are not part of EPS if their salary is above wage ceiling, that ensures that the liability for EPF will persist only until the current members die and 50% less liability until their spouses die. So my guess is that it would be okay – just about.

The EPFO ought to prevent retirees from getting the higher EPS pension in exchange for a lump sum. This is a terrible deal for the EPFO

They also need to revise the EPS pension formula. See the Revised EPS Pension Calculator: How much will my EPS Pension increase? for details. Currently is based on the past 60 months EPS contributions. So I could contribute only Rs. 1250 a month all my service and just in the last 5 years to retirement, hike up the contribution to 8.33% of full basic +DA and get the full higher EPS pension. They should revise it and impose at least 10 years minimum contribution at 8.33% at full salary. This will ensure their safety and health.

Remember: it is not all about us. We need the system to survive too.

Do check out my books

You Can Be Rich Too with Goal-Based Investing, my first book is now available at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now.

The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)

Use this form to ask Questions or reg. the robo template ONLY (For comments/opinions, use the form at the bottom)

And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you. PLEASE DO NOT POST COMMENTS WITH THISFORM it is for questions only.

[contact-form][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Ask your question (Got an opinion or comment, use comment box at the bottom of the page. DO NOT post them here)” type=”textarea” required=”1″][/contact-form]

Do share if you found this useful

Do check out these related articles:

About the AuthorM. Pattabiraman(PhD) is the author and owner of freefincal.com. He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Follow @freefincal “Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis.
He conducts free money management sessions for corporates and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)

Want to conduct a sales-free "basics of money management" session in your office?

I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free, topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content. We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policyOur website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Post navigation

7 Comments

what you are telling that Pension i scalculated based last 5 year contribution is not correct. If sombody wants to have higher pension has has to contribute higher contribution for all the years of service. there is an element of no of years in the calculation The formula is pension= pensionable salary X no of years in service/70. The pemsaionable sarlary is taken as average of last 5 years. If one wants have in the middle os service to have higher pension at the time retirement, then he has to contribute from back date all the arrears with interest. Then only he will get. The recent supreme court judgement has only told this. If you give back higher contribution with interest then you will get the higher pemnsion from the date of your retirement ( 58 years)

What I am saying is exactly what you have written: The formula is pension= pensionable salary X no of years in service/70. The pemsaionable sarlary is taken as the average of last 5 years. The supreme court judgement only says: allow higher contribution from date of application. I can have 15Y service where for first 10Y, the EPS contribution is up to the ceiling and in the last 5Y, apply for EPS based on full basic. Then in the formula, the years of service = 15 and pensionable salary will only reflect the higher contribution made in the last 5Y. If my understanding is wrong, I will be happy to correct, if you can show me the relevant EPS pension documents. Ps. The supreme court judgement has nothing to do with this formula as that remains the same.

One of the problem with this for young people is what if you contribute high and then in your fifties move to a low paying job either for lack of opportunities or to have less stress free life etc. The calculation still takes your last drawn basic for eps calculation.

What happens if is leave job after contributing for 15 years and start my own business. will they give me pension once i reach 58 based on the last 5 years salary and 15 completed years of service-as in when i was employed.

My employer is deducting EPS contribution of Rs.1250 pm on the basic pay of Rs.15000. But my actual basic salary is Rs.23,000/- in March 2019. I would retire in March 2023. Assuming 5% increase every year in the basic salary, I would like to know how much pension I will get as per the recent SC judgment regarding higher pension.